The Financial Markets Authority (FMA) has given the industry some relief in new fund fee disclosure guidelines released last week.
In its new guidance note, the regulator clarifies several controversial fee disclosure issues including the classification of underlying funds, how to treat listed entities and what to include in the manager ‘basic fee’.
The changes follow three rounds of industry consultation with the final two focusing on the basic manager fee disclosure and the treatment of underlying funds, which attracted nine and 11 responses respectively.
According to the FMA regulatory response analysis, the regulator changed tack on the basic fee disclosure proposal after significant blow-back from the industry.
Under the FMA’s original proposals, managers would’ve had to separate out third-party payments in their ‘basic fee’ disclosures. However, the majority of submissions criticised the proposal as too complex and/or expensive to implement with others claiming the process would reveal “commercially sensitive information”.
“Based on submissions, it was apparent that the proposed approach to manager’s basic fee may introduce significant compliance costs for managers with little additional benefit to investors,” the FMA analysis says. “We have amended our guidance to accord more with existing industry practice, whilst still following the wording of the legislation. The amended approach also recognises the differences that exist in the way managed funds are structured and provides for more consistent and comparable disclosure.”
The FMA guidance note also devotes about half of its 15 pages to defining both the meaning of ‘underlying fund’ and how managers must disclose fees of any entities which meet that description.
In particular, most of the industry submissions lobbied against the inclusion of listed products – including exchange-traded funds (ETFs) and listed property funds – as ‘underlying funds’, citing administrative difficulties as well as potentially misleading information being included.
While the guidance note offers some clarification (including an ‘underlying fund’ ID flowchart based on an Australian model), the regulator stops short of excluding all listed products from fee disclosure requirements.
“We acknowledge that managers may face difficulty in ascertaining the management costs of a listed entity, particularly for investments in overseas entities,” the FMA response analysis says.
“Although the cost of compliance is a relevant consideration, we do not feel all listed entities should be excluded from the definition of an underlying fund simply because this would be a difficult exercise for the industry.
“We have clarified that there will not be any disclosable fees in relation to many listed entities, but we believe there are certain listed entities which have features highly synonymous of a fund and understand that the definition of ‘fund’ and ‘underlying fund’ in the Regulations were broadly drafted with these entities in mind.”
The fee disclosure guidance comes as the regulator enters the final stretch in the race to meet the December 1 deadline for full implementation of the Financial Markets Conduct Act (FMC).
According to another FMA release last week, just nine policy decisions remain on the regulatory to-do list including a ruling on which companies should actually be classed as managed investment schemes and how racing syndicates fit under the new regime.
FMA chief, Rob Everett, has also upped the regulatory PR campaign as the FMC deadline looms, delivering two high-profile industry speeches over the previous fortnight.
Everett told a Trans-Tasman Business Circle gathering last week that after five years in operation the FMA was at “the end of the beginning” in its quest to regulate NZ financial firms.
“And in terms of industry understanding of what we are trying to achieve, and the tools we intend using to do it, I’d say we are only just off the ground,” he said. “That’s not unreasonable given that we are barely two years into our new regime.”
Everett’s speech touched on some points also raised at his INFINZ Awards presentation a few days prior including the regulator’s focus on “culture”.
“… when we look at areas where we think, or we know, that customers are getting a raw deal; when we look at behaviour we don’t like in wholesale markets; when, in short, we look at poor conduct; we will be looking for cultural problems, and the indicators of those problems,” he told the INFINZ crowd.
Last week the FMA’s most notable action in the funds management industry also hit the headlines as the regulator faced demands in the Auckland High Court to supply further details on its market manipulation case against Milford Asset Management portfolio manager, Mark Warminger.
Warminger’s lawyer, Mike Heron, labeled the FMA case as “confusing” while calling for further details of the charges to be supplied. In the hearing, the FMA revealed evidence concerning certain Warminger trades in Fisher & Paykel Healthcare shares in May 2014.
While Justice Kit Toogood reserved his decision in the matter, the main case heads back to the Auckland High Court later in September.